FACTS: Your second client is a 42-year-old man. He graduated high school and then immediately started working for a lumberyard i
n the Portland area. He is single, has no dependents, and does not yet own a house. He rents a townhouse near his work. He has some concerns about whether he is properly preparing for retirement.
His hourly rate is $22.11. He is paid once per month based on a typical work year. He makes more money than anyone else in his neighborhood. His monthly rent is $750, including all utilities except the Internet. He doesn’t have any medical insurance coverage from his employer but does get coverage under the Affordable Care Act for $60 per month. He also does not have any kind of retirement account, and that is the issue that is really bothering him. He has now moved beyond middle age and he is starting to feel the desire to not work for the rest of his life. In addition, he wants to move to a new townhouse about ten miles from his work. The rent for the new townhouse would be $900 per month, including all utilities, and Internet access. He has been riding his bike to work since living in his current townhouse. There is no public transportation where his new house is located, so he would have to buy a car, something that he has not owned for several years since he sold his car to have enough money to make the security/damage deposit for his townhome. He isn’t sure if he can afford the higher monthly rent, a car payment, and car insurance. Lastly, he hasn’t taken a vacation since having summers off in high school and would like to know if he can afford to take one. He thinks he could have a good vacation for about $1,000.
Here are his questions for you:
QUESTIONS:
1. His employer has been withholding Federal and State income taxes from his paycheck. He would like to fill out a W-4 and claim “exempt” to stop employer from withholding Federal and State income taxes so that he can pay them to the government himself at the end of the tax year. In this way, he figures he could have more “flexibility” as to how much he spends every month. He knows that it works this way in Greece. Can he do this? Will his employer agree to stop withholding income taxes? Is he “exempt” from taxes? Explain.
2. What is his annual salary? How did you calculate it?
3. What is his annual net income? Show your calculations. Also, what percentage of his gross income does he actually “bring home” after paying state and federal taxes?
4. How much money do you recommend he have his employer deduct from his paycheck every month so by the end of the tax year he has paid all Federal income taxes? How did you decide this amount? Be specific as to how you did your calculations.
5. How much money do you recommend he have his employer deduct from his paycheck every month so that by the end of the tax year he has paid all State income taxes? How did you decide this amount? Be specific as to how you did your calculations.
6. What is his net monthly income available for budgeting and spending after paying state and federal income taxes, social security taxes, and Medicare taxes?
7. How much money can he afford to save every month for retirement? What assumptions are you making in deciding on a number? What, if anything, must he give up?
8. If he saves the amount you suggest in #7 and earns 7% interest compounded monthly, how much money will be in the account when he is 70 years old? How much will he have if the account earns 10% interest?
9. Can he afford to move to the new town house? Explain.
10. Should he move to the new townhouse or should he stay where he is? How much can he afford for a car payment every month if he moves to the new townhouse? How did you decide? Do you recommend public transportation or purchasing a car? Explain.
11. How much money can he save every month toward a vacation? Can he afford to save enough to take a vacation? What might he have to change or cut out to be able to afford a vacation?
12. He would like to stop paying Social Security and Medicare taxes, which, together, cost him 7.65% of his income. How can he accomplish this?
